FUNDAMENTAL ANALYSIS IN STOCK MARKET

Fundamental Analysis is a method used by investors and analysts to assess the intrinsic value of a security. Its goal is to assess whether a stock is undervalued or overvalued compared to market price.

1. Choose an Approach: Top‑Down vs. Bottom‑Up

  • Top‑Down Approach: Start with macroeconomic and industry analysis, then narrow down to individual companies. Helps identify sectors likely to outperform.

  • Bottom‑Up Approach: Begin with analysing a specific company first, then consider how industry and economy affect it. Ideal for spotting resilient companies in any environment

2. Economic & Industry Analysis

  • Macroeconomic Factors: Examine GDP growth, inflation, interest rates, unemployment, government policy, currency trends, and broader business cycles.

  • Industry Assessment: Use frameworks like Porter’s Five Forces or SWOT to evaluate competitive pressure, regulatory risk, market trends, growth potential, and barriers to entry.

3. Company Business & Management Overview

  • Understand the company’s business model: products/services, revenue streams, customer base.

  • Review leadership quality: management track record, governance, transparency, strategy, board structure.

  • Evaluate qualitative strengths like brand strength, patent protection, switch costs, network effects, or moats.

4. Analyse Financial Statements

  • Review three core statements:

    • Income Statement: Revenue growth, net profit margin, EPS trends

    • Balance Sheet: Assets, liabilities, equity; liquidity and leverage positions.

    • Cash Flow Statement: Operating cash flow, investing and financing flows; check sustainability and cash generation ability.

5. Calculate and Interpret Financial Ratios

  • Liquidity: Current ratio, quick ratio—measure short-term financial health.

  • Profitability: Gross margin, net margin, ROE, ROA—assess earnings relative to assets and equity

  • Efficiency: Inventory turnover, receivable turnover—how efficiently assets generate revenue.

  • Leverage: Debt-to-equity ratio, debt ratio—to understand financial risk.

  • Valuation: P/E, P/B, PEG—compare price versus earnings or book value, versus peers or benchmarks.

Optional deeper method:

  • DuPont Analysis breaks ROE down into Profit Margin × Asset Turnover × Equity Multiplier to pinpoint strengths and weaknesses.

6. Project Future Performance & Earnings

  • Review analysts’ earnings forecasts and compare them with historical performance to gauge sustainable growth.

  • Develop your own forecasts if you’re building a detailed valuation model.

7. Value the Company

  • Discounted Cash Flow (DCF): Estimate future cash flows and discount them to present value.

  • Comparable Valuation: Compare ratios like P/E and EV/EBITDA to peers or industry leaders to see relative value.

8. Monitor News & Company Events

Stay current with new earnings releases, product launches, mergers & acquisitions, regulatory changes, or insider filings. These material events can alter fundamentals significantly.

9. Make Your Recommendation

Based on whether the intrinsic value is above (undervalued) or below (overvalued) the current market price, decide to Buy, Hold, or Sell. Also factor in your time horizon, risk tolerance, and investment objectives

Conclusion

Fundamental analysis is a systematic framework for estimating whether a security is fairly priced by evaluating everything from the macroeconomic backdrop to company-specific financial and qualitative factors. While demanding in effort, it supports informed, long-term investment decisions grounded in real business fundamentals.

Let me know if you’d like help walking through a real company as an example—or exploring how fundamental analysis applies to different asset classes like bonds or commodities!

Scroll to Top